index

In the stock market, an index is a device that measures changes in the prices of a basket of shares, and represents the changes using a single figure. The purpose is to give investors an easy way to see the general direction of shares in the index.

The FTSE 100, for example, is calculated by taking a weighted average of the share prices of the largest 100 companies on the London Stock Exchange. Launched in 1984 with a base figure of 1,000, the FTSE is calculated continuously throughout the trading day. When the media report that 'FTSE climbed 37 points today' you don't know exactly which shares in the index climbed and which fell, but you get an immediate idea of the direction of the market.

Index funds base their investment decisions on tracking the companies in a particular index.